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    Weekly fixed income review: October

    Weekly fixed income review: October

    October 29, 2021 Fixed income
    Week to October 29, 2021


    • Two-year Treasury bond yields rise to 19-month highs as market expectations of a rate hike grow. Two-year Treasury yields spiked above 0.5% during the week, the highest level since March 2020, causing the yield curve to flatten, as expectations grew that the US Federal Reserve (Fed) would soon raise interest rates. The five-year inflation breakeven rate rose to almost 3%, its highest level for almost 17 years. In next week's Fed’s policy meeting a possible announcement on tapering plans may be due. Third-quarter GDP disappointed market expectations, however, coming in at just 2% annualized growth.

    • Municipal bonds attract buyers High grade municipal yields were stronger 10-years and out as the Presidential administration released details on a $1.85 trillion spending plan, which include a 15% corporate tax minimum and a surtax on wealthy Americans’ income. Lipper weekly inflows into municipals strengthened week-over-week, giving a 75th (of 76) successive week of municipal inflows. This brings year-to-date inflows to $91.4 billion, ranking the 2nd highest among full-year calendar inflows since 1992.

    • The Bank of Canada ends its bond-purchasing scheme and signals a likely earlier-than-expected rise in interest rates. Having been one of the first central banks to begin to taper, the Canadian central bank decided to wind up the bond purchasing program completely. It signalled a likely first increase in interest rates this cycle for April 2022. The 10-year government bond yield rose to a near two-year high of 1.7%, while rates rose across the maturity curve and the Canadian dollar appreciated.

    • UK to raise public spending. With recent borrowing coming in well below forecast, Chancellor Rishi Sunak took UK public spending to its highest level since the 1970s and the tax take to its highest level since the 1950s. The 10-year gilt yield dropped back below 1% during the week as bond prices rallied strongly following the government’s guidance that the supply of new gilts into the market would fall by approximately £60bn. This decrease is considerably more than had been expected by the market and reflects the better recent monthly borrowing requirement figures. It led to the largest one-day rally in bond prices since March 2020.

    Chart of the Week: Expectations of hiking sends two-year Treasuries to 18-month high

    Chart of the Week: Expectations of hiking sends two-year Treasuries to 18-month high

    Source: Bloomberg. Data as at September 30, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg US Corporate Index 85bp -1
    Bloomberg Euro Corporate Index 87bp +1
    Bloomberg Sterling Non Gilts Index 90bp +2
    Bloomberg US Corporate High Yield Index 286bp +1
    Bloomberg Pan-European High Yield Index 306bp -8
    Bond yields (10yr)
    USA 1.58% -5
    Germany -0.14% -3
    Japan 0.09% -0
    UK 1.01% -14
    EquitiesWeek-to-date change
    S&P 500 4,596 1.1%
    DJ Euro Stoxx 50 4,234 1.1%
    FTSE 100 7,249 0.6%
    DAX 15,696 1.0%
    Nikkei 225 28,820 0.1%
    EUR/USD 1.17 0.3%
    JPY/USD 113.58 -0.1%
    GBP/USD 1.38 0.3%
    Brent Crude ($ per barrel) 84.32 -1.4%
    WTI Crude ($ per barrel) 82.81 -1.1%
    Gold ($ per ounce) 1,798.91 +0.3%

    Source: Bloomberg, October 29, 2021. Prices close of business October 28, 2021.

    Economic calendar

    01 November: China Caixin manufacturing PMI, US ISM manufacturing PMI
    02 November: Eurozone manufacturing PMI
    03 November: UK housing prices, eurozone unemployment, US ADP private payrolls
    04 November: Eurozone PPI, US initial jobless claims, German factory orders
    05 November: Eurozone retail sales, US unemployment, US non-farm payrolls

    Week to October 22, 2021
    • The Federal Reserve (Fed) released its Beige Book update about the state of the US economy. US employers highlighted significant increases in prices and wages amid “modest to moderate” economic growth. If inflation continues its recent rise, Fed governor Christopher Waller said that the central bank may have to adopt “a more aggressive policy response” next year. The 10-year US Treasury yield rose a further 13bp to 1.70% over the week.

    • Heavy new issuance accompanied strong corporate earnings. The market saw over US$30 billion of new issuance, led by large deals from Goldman Sachs and Aercap, as well as Thermo Fisher, Micron, and Taiwan Semiconductor. Corporate spreads ended the week at 85bp, while the increase in overall yield levels has attracted demand from non-US investors and corporate pension plans.

    • High grade municipal yields were higher across the curve. New details emerged surrounding President Biden’s social and climate initiative as infrastructure talks continue. Tax increases on corporations and the wealthy (the main funding sources initially included in the plan), now face the prospect of removal. Although positive, the pace of inflows into municipals remained subdued as weekly tax-exempt flows measured just US$177 million (as of October 20). Nevertheless, the trend for fund flows remains very positive.

    • German producer price inflation rose to 14.2% in September. The highest annual rate for PPI rate for 47 years was largely due to higher energy prices (+32.6% year on year), supply chain bottlenecks and base year effects. The 10-year German Bund yield rose a further 6bp to -0.10% over the week.

    • UK inflation was reported lower than expected but the decline is likely to be temporary. Annual headline inflation eased to 3.1% in September, from August’s nine-year high of 3.2%, though it is still expected to rise above 4% (compared with the BoE’s 2% target) given higher energy and food prices. The 10-year UK gilt yield rose a further 10bp to 1.20% over the week. 

    • Chinese economic growth slowed. China’s GDP grew by a less-than-expected 4.9% yoy in the third quarter, having grown 7.9% in the previous three-months and against a target of above 6%. Power shortages, supply constraints, COVID-19 outbreaks, and worries about Evergrande and the wider property sector all weighed on the economy. People’s Bank of China officials said any contagion from Evergrande’s debt crisis was manageable and the economy was “doing well”, reducing expectations of further policy easing.

    Chart of the Week: Germany - producer price inflation

    Chart of the Week: Germany - producer price inflation

    Source: Bloomberg. Data as at September 30, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg US Corporate Index 85bp 0
    Bloomberg Euro Corporate Index 87bp 0
    Bloomberg Sterling Non Gilts Index - -
    Bloomberg US Corporate High Yield Index 281bp +8
    Bloomberg Pan-European High Yield Index 314bp -3
    Bond yields (10yr)
    USA 1.70% +13
    Germany -0.10% +6
    Japan 0.09% +1
    UK 1.20% +10
    EquitiesWeek-to-date change
    S&P 500 4,550 1.8%
    DJ Euro Stoxx 50 4,156 -0.7%
    FTSE 100 7,190 -0.6%
    DAX 15,473 -0.7%
    Nikkei 225 28,709 -1.2%
    EUR/USD 1.16 -0.4%
    JPY/USD 113.99 0.2%
    GBP/USD 1.36 0.5%
    Brent Crude ($ per barrel) 84.61 -0.3%
    WTI Crude ($ per barrel) 82.50 +0.3%
    Gold ($ per ounce) 1,782.90 +0.9%

    Source: Bloomberg, October 22, 2021. Prices close of business October 21, 2021.

    Economic calendar

    25 October: Germany Ifo business climate
    26 October: US house prices, US consumer confidence
    27 October: US Q3 GDP, Germany consumer confidence, US durable goods orders
    28 October: BoJ interest rate decision, ECB interest rate decision, US initial jobless claims
    29 October: Eurozone Q3 GDP, eurozone CPI, US personal income, US personal spending, US core PCE inflation

    Week to October 15, 2021
    • US inflation re-established a 13-year high last month: Having dropped to 5.3% in August after two consecutive months at 5.4%, annual consumer price inflation was back at 5.4% in September, the highest level since 2008. Food, housing and new vehicle prices all rose while energy costs were up by around 25%. The core consumer price index rose 4% year on year, the same rate as in August. These figures did little to diminish expectations that the US Federal Reserve (Fed) would soon commence tapering its bond purchases and that an interest rate hike was closing in. Earlier in the week, the Fed’s Vice Chairman Richard Clarida stated that the “substantial further progress” that the Fed had been looking for regarding employment trends, which would pave the way for a tightening of policy, had been largely met. The yield curve flattened as two-year Treasury bond yields touched 0.37%, their highest level since March 2020, and the 10-year Treasury bond yield eased after climbing above 1.6% earlier in the week.

    • Commodity prices continued to surge. While many commodities, including copper and zinc, rallied over the week, much of the focus was on West Texas Intermediate. Its price climbed above $80 per barrel to its highest level since 2014 as demand/supply conditions remained supportive for oil. Supply will likely remain restricted given OPEC’s recent decision not to raise production levels by more than what had already been agreed – a monthly increase of 400,000 barrels per day – and as bottlenecks around the transportation of oil remain seemingly entrenched for now.

    • Having warned on the rising threat of stagflation last week, the IMF officially unveiled its new forecasts. The IMF reduced its forecast for global growth this year only marginally, from 6.0% to 5.9%, while keeping the outlook for 2022 unchanged at 4.9%. There was a large cut in the 2021 US growth forecast, from 7.0% to 6.0%, while the UK’s growth outlook was cut by only 0.2% to 6.8%, still the highest growth forecast among G7 nations. The IMF continued to warn on the imbalances in the global economy, the risks to growth, and the threat of rising inflation. The IMF’s Chief Economist Gita Gopinath stated that “central banks should be prepared to act quickly if the risks of rising inflation expectations become more material in this uncharted recovery”.

    • Municipal yields were steady as the Treasury market digested Fed meeting minutes and rising breakeven inflation. Weekly new issue supply was moderately high given a four-day trading week, while 30-day visible supply progressively increased to exceed $14bn. The pace of weekly inflows into municipals highlighted softer demand, with $461m for the week ended October 13. The pace of combined weekly/monthly fund inflows still remains the fastest on record year-to-date despite the recent slowing trend.

    • Yields on high yield bonds surged to new high levels in China. As Evergrande missed another payment on an offshore bond and Standard & Poor’s cut its ratings on other property developers in the country, yields in the high yield sector surged and the spread between high yield, or junk, bond yields and those on investment grade bonds leapt to a lofty 24%. In other news, China’s producer price inflation rose to a new high of 10.7% year on year, reflecting the surge in commodity prices.

    Chart of the Week: Oil price climbs to its highest level since 2014

    Chart of the Week: Oil price climbs to its highest level since 2014

    Source: Bloomberg. Data as at October 15, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg US Corporate Index 86bp 0
    Bloomberg Euro Corporate Index 88bp +2
    Bloomberg Sterling Non Gilts Index 90bp 0
    Bloomberg US Corporate High Yield Index 295bp 0
    Bloomberg Pan-European High Yield Index 319bp +4
    Bond yields (10yr)
    USA 1.51% -10
    Germany -0.19% -4
    Japan 0.08% -1
    UK 1.04% -12
    EquitiesWeek-to-date change
    S&P 500 4,438 1.1%
    DJ Euro Stoxx 50 4,149 1.9%
    FTSE 100 7,208 1.6%
    DAX 15,463 1.7%
    Nikkei 225 28,551 1.8%
    EUR/USD 1.16 0.2%
    JPY/USD 113.64 -1.2%
    GBP/USD 1.37 0.5%
    Brent Crude ($ per barrel) 84.00 +2.0%
    WTI Crude ($ per barrel) 81.31 +2.5%
    Gold ($ per ounce) 1,796.78 +2.3%

    Source: Bloomberg, October 15, 2021. Prices close of business October 14, 2021.

    Economic calendar

    18 October: China Q3 GDP, US industrial production
    19 October: US housing starts, Japan trade balance
    20 October: UK CPI, PPI and RPI, eurozone CPI
    21 October: US initial jobless claims, US Philly Fed survey, Japan CPI
    22 October: UK retail sales, US, UK and eurozone composite PMI

    Week to October 8, 2021

    • Surging oil, natural gas and other commodity prices saw global bond yields climb during the week. Bond markets sold off during the week on persistent inflation concerns. West Texas Intermediate climbed to a seven-year high, touching $80 per barrel intraday, as OPEC members refused to increase production levels above agreed volumes. Meanwhile, natural gas futures breached a near 13-year high early in the week as gas supplies, especially from Russia into Europe and the UK, remained very tight. They fell back later in the week as President Putin stated that Russia would finally increase supply. Coal prices rose to all-time highs at the beginning of the week as tight supply levels, especially in Asia, have caused a severe shortage of power in China and India. The US 10-year Treasury yield remained above 1.5% while the 10-year German Bund yield rose to –0.15%, a level not seen since late June. The UK 10-year gilt yield rose to 1.13%, the highest level since May 2019.

    • The IMF warned on slowing growth and rising inflation. A week before it officially amends its economic forecasts, IMF chief Kristalina Georgieva warned that the world economy faces a potential perfect storm of stagflation, with growth rates beginning to wane just as inflation picks up. Georgieva highlighted a two-speed recovery, with developed nations able to recover their pre-pandemic economic levels, most likely in 2022, several years before emerging nations, largely owing to the availability of vaccines. Additionally, in her view inflation may become more entrenched in emerging economies relative to developed ones.

    • Congress hatched a temporary compromise so that the US debt ceiling was raised, delaying the prospect of a technical debt default. Although there was no final agreement in Congress on the national debt ceiling, which was likely to be breached within days, the Republicans and Democrats agreed on a temporary lifting of the ceiling by approximately $500bn to $28.9trn - a case of ‘kicking the can’ a little further down the road. Without compromise, there have been increasing signs that the Democrats may ignore convention and side-step the ‘filibuster’, unilaterally raising the debt ceiling based on the party’s effective majority in the Senate. Treasury secretary Janet Yellen warned of a run on the dollar and a recession if Congress allowed the US to enter a technical default. However, the issue is likely to reappear as soon as December as debt levels most likely approach the new ceiling.

    • Interest rates rose in New Zealand, Poland and the Czech Republic. The Reserve Bank of New Zealand hiked rates by 25bp to 0.5%, in a widely expected move, marking the first increase in rates since mid-2014. Inflation in the country is running at 10-year highs. The Polish central bank surprised markets with its 40bp hike to 0.5%, as such a hike had not been expected by market commentators. The Czech central bank raised rates by 75bp to 1.5%, the largest hike for 24 years in response to soaring inflation. .

    • Another Chinese real estate developer defaulted on its debt payments. In an escalation of the drama surrounding the Chinese property sector, coming after Evergrande’s failure to meet required payments on two offshore bonds, the market was rocked by the news that housing company Fantasia Holdings had missed a payment on a dollar-denominated debt issue, amounting to around $200m. This caused panic selling in the Chinese high yield bond sector as fears of contagion grew. Trading in Evergrande’s shares had been suspended on Monday ahead of any announcement regarding a deal.

    Chart of the Week: US Treasury yields rose over the week

    Chart of the Week: US Treasury yields rose over the week

    Source: Bloomberg. Data as at October 8, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg US Corporate Index 85bp +1
    Bloomberg Euro Corporate Index 86bp +1
    Bloomberg Sterling Non Gilts Index 90bp +2
    Bloomberg US Corporate High Yield Index 293bp 0
    Bloomberg Pan-European High Yield Index 316bp +12
    Bond yields (10yr)
    USA 1.57% +11
    Germany -0.19% +4
    Japan 0.07% +1
    UK 1.08% +8
    EquitiesWeek-to-date change
    S&P 500 4,400 +1.0%
    DJ Euro Stoxx 50 4,098 +1.6%
    FTSE 100 7,078 +0.7%
    DAX 15,251 +0.6%
    Nikkei 225 27,678 -3.8%
    EUR/USD 1.16 -0.4%
    JPY/USD 111.63 -0.5%
    GBP/USD 1.36 +0.5%
    Brent Crude ($ per barrel) 81.95 +3.4%
    WTI Crude ($ per barrel) 78.30 +3.2%
    Gold ($ per ounce) 1,756 -0.3%

    Source: Bloomberg, October 8, 2021. Prices close of business October 7, 2021.

    Economic calendar

    11 October: China money supply
    12 October: Japan PPI, UK unemployment, eurozone economic sentiment
    13 October: UK trade balance, UK and eurozone industrial production, US CPI, German CPI
    14 October: China CPI, US initial jobless claims, US PPI
    15 October: US retail sales, US Michigan consumer sentiment, eurozone trade balance

    Week to October 1, 2021

    • Global bond markets endured their worst month of the year. The Bloomberg Global Aggregate Total Return Index fell precipitously as major central banks gave the strongest hints yet that the long period of ultra-loose monetary policy was close to an end (see graphic). This reflects the growing sense that inflation is at risk of becoming more fully entrenched than previously expected. Wholesale energy prices have surged in Europe in recent weeks, oil prices touched three-year highs this week, and supply-chain bottlenecks have evolved in many industries.

    • Federal Reserve (Fed) Chairman Jerome Powell expects more persistent inflation. In a testimony before Congress, Powell indicated that he believes current inflationary pressures – namely, higher commodity prices, supply chain bottlenecks, and rising wage demands – could be stickier than previously imagined. The central bank has duly increased its inflation forecast for 2021 to 4.2%, more than double its long-term target. This view was reinforced by the St. Louis Fed Governor James Bullard who called for two interest rate hikes in 2022. Additionally, there appeared to be reduced demand for two- and five-year Treasury auctions during the week, with the cover ratio for the former issue the lowest since 2008. Bond yields were also affected by the potential breaching of the national debt limit, with the Republicans and Democrats indulging in brinkmanship ahead of a potential default later this month. The 10-year Treasury yield rose above 1.55% during the week, its highest level since June.

    • The European Central Bank (ECB) struck a note of caution on interest rate hikes. ECB President Christine Lagarde expressed a more sanguine tone compared with statements coming out of the Fed and the BoE regarding a possible increase in interest rates. She made it clear that the ECB did not want to jeopardise a still brittle economic recovery by tightening monetary policy too soon. She stated that the central bank should not “overreact to transitory supply shocks that have no bearing on the medium term”. Yields rose over the week as inflation across the eurozone continued to grow. Annual consumer inflation in France touched a near 10-year high of 2.7% in September, while the rate of inflation in Germany rose to 4.1%, a near 28-year high. The 10-year bund yield rose above -0.2% for the first time since June.

    Chart of the Week: Bloomberg Global Aggregate Total Return Index slumps on inflation fears (%)

    Chart of the Week: Bloomberg Global Aggregate Total Return Index slumps on inflation fears (%)

    Source: Bloomberg. Data as at October 1, 2021.

    Bond spreads (over govts)Week-to-date change (bp)
    Bloomberg US Corporate Index 84bp +2
    Bloomberg Euro Corporate Index 84bp 0
    Bloomberg Sterling Non Gilts Index 86bp 0
    Bloomberg US Corporate High Yield Index 289bp +12
    Bloomberg Pan-European High Yield Index 295bp +13
    Bond yields (10yr)
    USA 1.49% +4
    Germany -0.20% +3
    Japan 0.07% +1
    UK 1.02% +10
    EquitiesWeek-to-date change
    S&P 500 4,308 -3.3%
    DJ Euro Stoxx 50 4,048 -2.7%
    FTSE 100 7,086 0.5%
    DAX 15,261 -1.7%
    Nikkei 225 29,453 -2.6%
    EUR/USD 1.16 -1.2%
    JPY/USD 111.29 -0.5%
    GBP/USD 1.35 -1.5%
    Brent Crude ($ per barrel) 78.52 +0.6%
    WTI Crude ($ per barrel) 75.03 +1.4%
    Gold ($ per ounce) 1,756.95 +0.4%

    Source: Bloomberg, October 1, 2021. Prices close of business September 30, 2021.

    Economic calendar

    06 September: Eurozone investor confidence, German factory orders, UK retail sales
    07 September: China trade balance, eurozone and Japan (final) Q2 GDP
    08 September: US consumer credit
    09 September: China CPI and PPI, US initial jobless claims
    10 September: UK trade balance, UK industrial production, German CPI, US PPI

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